MARKET WATCH: MENA fighting boosts oil to 30-month high

Escalating turmoil in the Middle East and North Africa (MENA) helped push oil prices to a 2½-year high and gold to an all-time record Mar. 23 in the New York market as investors sought safety.

Sam Fletcher
OGJ Senior Writer

HOUSTON, Mar. 24 -- Escalating turmoil in the Middle East and North Africa (MENA) helped push oil prices to a 2½-year high and gold to an all-time record Mar. 23 in the New York market as investors sought safety.

Traders “had plenty to react to including continued fears regarding Middle East supply disruptions, concerns of retaliation following a bombing in Israel, and a mixed [Energy Information Administration] inventory report showing a larger-than-expected build in crude inventories,” said analysts in the Houston office of Raymond James & Associates Inc.

“Natural gas rose 1.9%, reaching its highest level in 7 weeks on forecasts for chilly temperatures in early-Spring across northern parts of the country,” they said, adding, “The [equity] market offset an early slump to end the day modestly in the black on strength in the materials and retail sectors. Meanwhile, energy stocks underperformed the broader market to close roughly flat.”

They reported prices for crude, natural gas, and equity stocks were up in early trading Mar. 24.

In London, however, North Sea Brent weakened on “very poor” European refining margins data, said James Zhang at Standard New York Securities Inc., the Standard Bank Group.

Zhang said, “As we anticipated, the market appears to have chosen to overlook the inventory build in crude and counter-seasonal inventory changes for distillate in the US, rather choosing to focus on the persistent tensions in MENA. We expect the MENA unrest to pose further upside risks to oil prices. That said, the physical market appears to be well supplied for now. Given the near record high speculative length in the oil market and a seasonal slowdown in demand, the downside risk also increases.”

In Libya, Allied forces continued their attacks on Moammar Gadhafi’s forces, “but there appears no clear end-game for the military intervention from the UN, which implies a prolonged period of conflict,” Zhang observed.

Olivier Jakob at Petromatrix, Zug, Switzerland, said, “The coalition continues its job in Libya but has still not worked out who is commanding and what to do once it starts to run out of targets. There will be growing pressure for a missile to suffer a mechanical [failure] and hit somebody wearing an ushanka [a Russian style cap with ear flaps] who was unfortunately at the wrong place at the wrong time.

Anuj Sharma, research analyst at Pritchard Capital Partners LLC in Houston, said, “Syria became the latest Middle Eastern country to get hit with the popular unrest in the region. The turmoil in Syria got bloody, killing many people when government forces shot at the protestors. And the concerns about Israel getting caught in the crossfire of the heightened tensions in the Middle East drove the risk-premium even higher.”

In Yemen, Jakob said, “It is given that [Friday, the Muslim Sabbath] will be an ugly day [of possible violent demonstrations]. Yemen produces about 220,000 b/d, and some of it will have to be replaced too by Saudi Arabia.”

He added, “With the terrorist bombing yesterday in Israel and further shootings in Syria, the oil markets are not lacking geopolitical inputs, but daily trading volume is still not coming back.” The days EIA releases its weekly inventory report “usually show an increase in volume but that was not the case yesterday,” Jakob said. “Volume in West Texas Intermediate is half what it was when the situation in Libya started to deteriorate (in mid-February) while in Brent volume is half what it was last week. Low volume does not mean that prices cannot climb as technical trading can easily trend in a low volume environment, and WTI is technically trying to break the previous highs of $106.95/bbl; but it does show that the market is not in the same panic mode about the MENA as a month ago.”

Meanwhile, ExxonMobil Corp. reported its four refineries in Japan are back online and operating "over and above" standard rates. It also reopened its Shiogama Terminal, allowing fuel deliveries to disaster areas.

In other news, Raymond James analysts noted several months of inspection by a third-party Norwegian firm determined a deformed piece of drill pipe prevented the blowout preventer’s blind shear rams from properly sealing the Macondo well, causing the blowout last summer. The report assigned no blame but suggested several changes in BOP design for the industry.

To no one’s surprise, Rep. Edward Markey (D-Mass.) said the Department of the Interior should start “an immediate top-to-bottom” probe of the efficiency of BOPs.

US inventories
EIA reported the withdrawal of 6 bcf of natural gas from US underground storage in the week ended Mar. 18, below the Wall Street consensus for an 8 bcf outtake. That left 1.6 tcf of working gas in storage, down 12 bcf from a year ago but 34 bcf above the 5-year average.

EIA earlier reported commercial US crude inventories rose 2.1 million bbl to 352.8 million bbl in the week ended Mar. 18. That exceeded the Wall Street consensus for an increase of 1.5 million bbl. Gasoline stocks fell 5.3 million bbl to 219.7 million bbl in the same period, also out-distancing market expectations of a 2 million bbl decline. Both finished gasoline and blending components inventories were down. Distillate fuel inventories remained unchanged at 152.6 million bbl last week, despite a consensus for a 1.5 million bbl draw.

“The term structure in WTI strengthened significantly despite an inventory build at Cushing, Okla., and in [the Midwest Petroleum Administration District] PADD 2 as a whole,” said Zhang. Reformulated blend stock for oxygenate blending (RBOB) outperformed heating oil in reaction to the inventory report.

Gasoline demand remained robust while distillate demand fell, reflecting seasonal demand patterns for each product. “Overall, the inventory changes paint a more bullish picture for gasoline cracks than the normal seasonal pattern would suggest, but is rather bearish for distillate cracks with large inventory overhangs,” Zhang said.

Energy prices
The May contract for benchmark US light, sweet crudes rose 78¢ to $105.75/bbl Mar. 23 on the New York Mercantile Exchange, the highest closing price for a front-month contract since September 2008. The June contract increased 69¢ to $106.21/bbl. On the US spot market, WTI at Cushing was up $1.25 to $105.25/bbl as it tried to get in step with the front-month contract price.

Heating oil for April delivery gained 2.12¢ to $3.06/gal on NYMEX. RBOB for the same month increased 1.68¢ to $3.02/gal.

The April natural gas contract climbed 8.1¢ to $4.34/MMbtu on NYMEX. On the US spot market, gas at Henry Hub, La., escalated 12.5¢ to $4.21/MMbtu.

In London, the May IPE contract for North Sea Brent crude traded above $116/bbl before closing at $115.55/bbl, down 15¢ for the day. Gas oil for April inched up 50¢ to $988/tonne.

The average price for the Organization of Petroleum Exporting Countries' basket of 12 reference crudes gained 86¢ to $111.09/bbl.

Contact Sam Fletcher at samf@ogjonline.com.

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